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23 November 2001
News Release
SECURITIES COMMISSION WARNS INVESTORS SEEKING HIGH RETURNS
"As interest rates fall, people who rely on interest for income may be attracted to propositions promising high returns," Commission Chairman Jane Diplock says. "This may expose them to high risks which they may not be well placed to bear."
One area of concern which promises relatively high returns is contributory mortgages. These are arrangements whereby individual investors, often quite small investors, contribute funds which are lent to property owners or developers to enable them to refinance or develop large properties.
The investors' money is pooled and lent to the borrower or developer, usually at high rates of interest. Often, the developer or borrower cannot get finance from banks or other traditional lending institutions and is therefore prepared to pay the higher rates of interest charged by contributory mortgage brokers.
Some of these projects are marginal at best. In some cases the rights of the small investor may be subordinated to the rights of prime lenders such as a bank or other financial institution, which has first claim on the property if the borrower defaults.
More than $195 million of New Zealanders' savings are invested in contributory mortgages.
"People who invest in contributory mortgages should be aware that they might be taking a risk that the banks won't take," Jane Diplock says.
Undoubtedly some contributory mortgage schemes are well managed and appropriate investments. However, investors need to know all the facts before entering into such investments.
They should seek expert, independent advice from an investment adviser, lawyer or accountant, and not rely only on information from the contributory mortgage broker.
Some issues investors should ask about are:
- the risks they are likely to face in order to get the high interest rate;
- the true priority and nature of their mortgage;
- the ability of the mortgage to be refinanced as it falls due;
- the timing and certainty of both interest payments and capital repayments;
- the likelihood of repayment of their investment should the project fail;
- any fees or other costs payable by them;
- the reputation and track record of the developer and the mortgage broker; and
- any interest the broker or promoter may have in the project to be financed.
There also may be other questions that relate to the particular project.
"We have asked the Registrar of Companies to inspect several contributory mortgage brokers making offers which we consider may not comply with the law," Jane Diplock says.
"We believe there is room for improvement in the standard of compliance with securities law in the contributory mortgage industry and that investors should take independent advice before entering into these investments."
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Contact: Catherine Chapman 04 471 7659